Bare trust for our children?

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    Bare trust for our children?

    Hello,

    We currently own 3 rental properties, plus our residential property.

    The three rentals have no mortgage, and are all in my wifes name (she only works part time so this works best tax wise)

    We have two young children (10 & 8 years) and are thinking of putting these three rental properties into a bare trust for them. We would probably keep the home we live in, in our ownership.

    Just looking from feedback from other parents who might have done the same sort of thing

    The intention would be to put these jointly into a bare trust for both children, so they own 50% of each property, is that a good idea or are we better off just putting each property 100% into the name of one child?? to avoid any issues re splitting them up later?

    Our kids are great (so far) but we do have some slight reservations with the bare trust, as the property passes over to the kids when they reach age 18. I did raise this with the tax advisor and he said "so just dont tell them you have set it up"!! so if we dont tell the children they would not be able to find out??

    Does the bare trust have to be registered with the land registry?

    Do we formally notify the tax office?

    The reason for doing this is to avoid issues with taxation, CGT etc. ultimately our houses are for the kids so it makes sense just to sort it out now.

    Any other tips/suggestions would be appreciated.

    Thanks

    #2
    The IHT allowance stands at £ 325K each or £ 650K for married couple plus family home if left to children ( up to £350K ) . So you + wife caan leave £1 Mil before tax at 40% applies.

    For bare trusts you need to consult a solicitor specialising in wills and inheritance for advice. A trust has to pay income tax at 40% .

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      #3
      Don't think a *bare* trust will pay income tax - it is treated as the child's income and taxed accordingly (before age 18 income will be taxed as yours over £100). However Capital gains tax is payable when trust is set up - which is likely to be massive if you put 100% of three properties into the trust in one shot.

      You don't declare to land registry, but definitely do have to declare to HMRC as capital gain on your tax return. You also need a PROFESSIONAL valuation at the timepoint trust starts since this is not an open market sale.

      Comment


        #4
        Just to elaborate on the above a little more - a bare trust is treated for tax purposes exactly as if the as if the beneficiary owns the trust property as themselves (i.e they are liable to Income Tax and CGT, and will need to compete tax returns). However there is an anomaly in that if the parent is the source of the trust asset, trhen an entirely different rule also kicks in which is that a) if the person is a minor <18, and b) if the income from the trust (not CGT) is > £100/year then the trust income is treated as if it is part of the parent's income for tax (in exactly the same way it would if you simply deposited £1000000 into your 5 year old child's bank account).

        It is also not correct that " the property passes over to the kids when they reach age 18. I did raise this with the tax advisor and he said "so just don't tell them you have set it up"!!" - your advisor has given you totally erroneous advice - you are obliged to inform them when they reach 18 - they legally own the property and have the obligations that go with such ownership, and if they fail to pay income tax (etc) on it they will "go to jail" - not what you want...... nor what they want. In fact they legally own the property once the trust is set up, with the snag that legal ownership on HMLR cannot occur if under age 18 - but for all other intents and purposes they own it.

        Comment


          #5
          Putting the property in the children's names might cause some problems later on when they start college and uni with regards to bursaries etc. My son has just started college (6th form) and part of the bursary claim form asks if he has any assets.

          You might want to consider what would happen if your child should get into debt - could the creditor force the sale of the properties to reclaim the debt?

          If one of your children needs social housing they will have to declare interest in the properties which you might have to put up for sale in order for them to be considered for social housing.

          Comment


            #6
            I suggest that you sit down with a family law specialist.
            I don't think that a bare trust is necessarily the best way forward (although without detailed knowledge of your situation it's just not possible to know).

            If you set up a more formal trust, the property can move out of your control into the trust's control, thereby removing it from your estate (both really and for IHT purposes).
            How much needs to move depends on the various values (and you might find that moving a smaller proportion is actually more efficient.

            The trust can own the property and direct the income where it seems appropriate, and can limit access to your children until you see fit.
            One advantage of this arrangement is that you can let your children receive the benefit of your investment and hard work and keep the properties out of their personal possession also.
            So they don't get taken in divorce settlements, sold for drugs or Ferraris.

            See a solicitor.
            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

            Comment


              #7
              I agree with jpk that you need to see a "private client" solicitor or accountant to discuss the matter. It is very important not to allow the tax tail to wag the everything else dog.

              Comment


                #8
                Hi,

                As you will see mentioned a tust will have to adhere to taxes in that jurisdiction. That being said why not consider an offshore trust with a uk PMC Ltd that controls the assets? A lot of landlords are now using this option because the trust is in a 0% tax jurisdiction so is the assets effectively. A landlord who puts their assets into an offshore discretionary trust can name their family members as beneficiaries and will protect them from 0 capital gains and inheritance tax and you would also benefit from 0 income tax from the rents you receive!

                Using trust planning is not hidden from HMRC as it is perfectly legal and has worked for over 20 years. The advisors set everything up for you and would support you if there was a HMRC enquiry. Of the thousands enquired none to this date have had any issues.

                Are you up to date with the new changes? Even if your partner is a lower earning individual right now when the changes come into effect the increased rental profits will most likely put her into the higher tax bracket. As an assumptive example lets say your income per property is £1500 and the BTL mortgage is £1000 you will only be taxed on £500 each property each month. By 2021/22 you will be taxed on all £1500! As this can affect personal tax brackets you could expect to pay up to 40% on all income received from the properties. Some landlords are looking to sell right now due to the huge impact it will have on them and their families life's but there is legal planning strategies that can prevent you from having to do this.

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